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Proposed Rule Aims to Improve Accuracy of Medicare Hospital Payments

April 13, 2007 -- The Centers for Medicare and Medicaid Services (CMS) announced a proposed rule late Friday it said would increase the accuracy of Medicare payments for inpatient hospital care while improving its quality. The 1,204-page proposal also aims to notify the public about the financial involvement of referring physicians in doctor-owned specialty hospitals.

On average, Medicare inpatient rates for hospital operating expenses would rise 3.3 percent in fiscal 2008 for hospitals that report data on quality of care to CMS. Altogether, the 3,500 acute care facilities subject to the proposal would receive an added $3.3 billion because of the increase.

The proposal calls for continuing steps started by CMS two years ago to adjust payments to hospitals for the severity of illness of the patients they treat. Patients treated by hospitals are classified according to their diagnosis in categories called "diagnosis-related groups," or DRGs; the proposed rule would create 745 new "severity-adjusted" DRGs.

Severity adjustment is designed to eliminate the incentive hospitals have to "cherry pick" patients—in other words, to only treat relatively healthy patients within a DRG in order to keep more of the DRG payment because treatment costs are lower. Severity adjustments pay hospitals more if the patient is relatively sick and therefore more costly to treat, and less if the patient is in relatively good shape.

The proposal also continues a phase-in started in fiscal 2007 by CMS of another step to improve the accuracy of hospital payments—basing payment rates on the actual costs of the hospital rather than on what the facility charges. Under the proposal, two-thirds of a DRG payment would be based on actual costs and one-third based on charges; in 2009, hospitals would be paid 100 percent based on actual costs.

Specialty hospitals are a particular focus of the proposal, both in terms of their payments and in terms of alerting the public about potential safety and conflict-of-interest concerns patients may have about the facilities.

With respect to payment, CMS initially began its work on severity adjustment by focusing on doctor-owned specialty hospitals that treat cardiovascular conditions because of concerns that only relatively healthy heart patients were being treated by those facilities.

"Last year, we estimated that payment reforms for 2006 and 2007 reduced payments to cardiac specialty hospitals by over 5 percent," CMS said in a press release Friday. The proposed fiscal 2008 revisions "are estimated to reduce payments an additional 4 percent," the agency said.

The proposal also would create new disclosure requirements for specialty hospitals, which single out a specific category of surgical procedures and boast that their concentration on that type of care makes them more efficient.

Patients would have to be notified that the facilities are doctor-owned, and be able to obtain a list of names of the doctors who own the facilities. A doctor-owner who was also on the staff of a specialty hospital would be required, if he or she referred a patient to that facility, to notify the patient of his or her status as an owner at the time of the referral.

Patients also would have to be notified in writing if the specialty hospital did not have a doctor at the facility 24 hours a day, seven days a week. The facility would have to inform the patient how it planned to meet his or her medical needs if he or she developed an emergency condition when no doctor was on site.

The proposed rule also would bring to 32 the number of quality measures on which hospitals would have to report data in order to receive the full 3.3 percent payment increase. In addition, the proposal would begin implementing payment provisions preventing a facility from receiving full reimbursement for follow-up care it provides when a patient develops an infection or other preventable medical condition at the hospital.

CMS also is proposing to change the way it pays for medical devices that are recalled or replaced at no cost to the hospital or at a reduced cost. Now, "Medicare pays the same for the second procedure, even if the hospital acquires the device for free or at a reduced cost, as it did for the initial procedure when the hospital had to purchase the device," CMS said. "The proposed rule would reduce payment when hospitals use a recalled or replacement device at no cost or with partial credit."

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